Large Health Savings Accounts: A Step Toward Tax Neutrality for Health Care
MICHAEL F. CANNON
Cato Institute February 27, 2007
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=969719
The creation of tax-free health savings accounts presents a new opportunity
to reduce the distortions created by federal tax preferences for health-related
expenditures, and ultimately help eliminate those distortions. This paper
proposes changes to current law that would allow most workers to receive
the full amount that they and their employer spend on their health benefits
as a tax-free cash contribution into the worker's health savings account.
Restructuring the exclusion for employer-sponsored health benefits in this
way would enable more individuals to obtain health insurance that matches
their preferences, increase efficiency in the health care sector, and possibly
reduce inequities created by the exclusion. These changes also offer a means
of limiting the currently unlimited tax exclusion for employer-sponsored
health benefits that may be more politically feasible than past proposals.
Health Savings Accounts: Do the Critics Have a Point?
by Michael F. Cannon, Cato Institute, 2006
Health savings accounts, or HSAs, are a new health insurance option that became available in 2004. HSAs couple a tax-preferred savings account (the HSA) with high-deductible health insurance. Enrollees or their employers, or both, make tax-free contributions to the HSA. Enrollees use the funds in their HSAs to purchase medical care until they reach their deductibles. At that point, health insurance begins paying part or all of enrollees’ medical expenses.
HSAs reduce government’s influence over consumers’ medical decisions by reducing the price distortions created by the federal tax code. However, HSAs as they exist today do not eliminate those distortions. Current HSA law restricts consumers’ health insurance choices, makes it difficult for the chronically ill to save for their future medical needs, and discourages cost sharing above the health insurance deductible.
To address some of those shortcomings, President Bush proposes to reduce the price distortions further, through higher HSA contribution limits and tax credits for individuals who contribute to their HSAs or who purchase their own HSA-compatible insurance. Although those steps would be helpful, HSAs should be expanded further still to give individuals full ownership of and control over all their health care dollars.
Unfortunately, HSAs (and proposals to expand them) have become politicized. Critics contend that HSAs benefit only the healthy and the wealthy and that HSAs are ineffective or even harmful. In most cases, criticisms of HSAs fall flat. In some cases, the critics do have a point. However, the failures they identify stem not from HSAs or proposals to expand them but from the problems that HSAs are meant to correct. Expanding HSAs would help to correct those problems faster.
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